Is online losing its shine?

Online sales have been a reliable retail growth story for close to two decades, but new figures reveal a slowdown. Does this signify a levelling-out of sales online? Where will growth come from for pureplay and multichannel retailers? Drapers finds out.

Despite online sales growth of 16% during the first half of 2018, the latter part of the year painted a different picture. During the second half, UK online sales growth fell to 8.4%, and growth in September was the lowest for that month since 2014. This was followed in December by growth dropping to an all-time low of 3.6% – the slowest monthly rate ever recorded by the Capgemini IMRG Eretail Sales Index in 18 years of tracking.

Macro-economic factors are undoubtedly having an impact. IMRG notes the dip in consumer confidence as a result of uncertainty around Brexit as well as prominent high street collapses.

Strategy and insight director Andy Mulcahy says: “When a retailer like House of Fraser goes into administration, people get worried other retailers will too. They start to fear buying things because their capacity to return items or to redeem gift vouchers could disappear.”

Sarah Curran-Usher, partner at Retail Executives Advisory Network, agrees: “I think the slowdown is because consumers are being more cautious and reflecting on their own ability to spend. If things are tight, you hold back.”

Mixed picture

Behind the headline slowdown figure in December there are mixed fortunes. The electricals category is dragging down online sales overall. Over the year, growth in the category fell into a negative 3% and during the Christmas trading week, sales grew just 2%, as a result of a lack of technology innovation and consumer confidence.

By comparison, clothing sales during Christmas week were up 11.8%. Over 2018 menswear and footwear performed particularly strongly: menswear sales grew 22% year on year, thanks to a tailored offer and growing consumer demand, while footwear rose 18%.

When Drapers asked analysts and retailers if the overall slowdown in growth indicates a levelling-out of online sales, most said this is not the case. Consumers are not necessarily moving away from online sales. Instead, the figures reflect the macro-economic situation, but also new consumer demands.

“The retail landscape is changing and facing many headwinds,” said Rob Silsbury, marketing and ecommerce director at footwear retailer The Dune Group. “Some of this is macro-economic, but consumer behaviour is also going through huge shifts. Understanding these within your own customer base is essential.”

Curran-Usher adds: “I also believe bricks and clicks are starting to have a stronger influence on omnichannel penetration. What might have previously shown as online is now going into store, so there is a slight disruption to the online number.”

Maturing market

To some extent, the slowdown in ecommerce sales growth was to be expected. Online shopping is no longer in its infancy.

“It has been a growth sector for a long time and always getting bigger, so inevitably the rate will always come down,” said Mulcahy. “Our forecast for 2019 is 9% growth. It’s not as astronomical as before, but there is still growth.”

2018 online sales growth

2018 overall year-on-year growth: +11.8%

First half, 2018 year on year growth: +16%

Second half, 2018 year on year growth: +8.4%

December year-on-year sales growth at a glance

Overall online sales growth: +3.6%

Clothing: +5.8%

Menswear: +16.0%

Accessories: +13.7%

Footwear: +9.8%

Womenswear: +4.2%.

Source: Capgemini IMRG Eretail Sales Index

Sales gains are not easily made, however.

Silsbury says: “Growth is more complex to achieve today and sometimes more expensive. Brands now have to work much harder to have a point of difference.”

A great product is still at the core of successful retailers, but that alone is not enough.

He adds: “Modern consumers simply expect more from brands today than they did a year ago and we must all work ever harder to ensure that we cater for these needs. You need to have a great customer experience from beginning to end.”

Pureplay challenges: personalisation and profitability

Pureplay retailers have been the traditional beneficiaries of online sales growth in the past but in some instances are failing to deliver the customer experience now expected. The online catalogue approach that forms the foundation of the pureplay model is starting to look dated.

“Younger shoppers are often more sophisticated than the retailers trying to serve them. Searching through lots of product online is [not a great] customer experience,” says Daniel Bobroff, founder and CEO of creative technology business Coded Futures.

Improvements in personalisation could help to fulfil the promise.

“Retailers need to get this right and provide a compelling experience online that customers want to do again and again,” he adds. “Too many [retailers] look to the past way of doing things as if it’s a static situation but technology changes at lightning speed. What worked one or two years ago may not work as well now.”

IMRG’s Mulcahy notes that the introduction of better fit and personalisation technologies have been key to growth in the menswear category. Online retailer Thread, which offers styling tips and branded product for men, is a case in point. Sales were up 53% year on year in December, making the month its second largest for growth in 2018.

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Head of business development Terry Betts says growth in the last quarter was also driven by footwear: “We invested significantly in our footwear partners, identifying it as a huge opportunity based on data and it came through strong at +90% versus last year.” Throughout the final quarter of the year, Thread focused on improved content, upping its game around photography, style tips and styling shoots.

Men’s online styling service Thread is enjoying sales growth

Looking ahead, Betts says: “We’re doubling down on our USP and really refining personalisation and fit. We’re also looking to add lots more brands, as our customers are telling their stylists they want newness.”

Stephanie Parsons, principal consultant at ecommerce consultancy Practicology, believes pureplays will increasingly focus on profitability: “It will be key, especially as we’ve seen such high levels of discounting. Offering a blanket discount off everything onsite is not scalable or sustainable.”

Improved profitability could come by improving the customer experience through recommendation engines and personalisation.

“[Pureplays] are starting to give a more personalised experience through social to help consumers decide what trend to buy, but as more retailers interact with consumers on a personal level, the messaging has to be right, or consumers will block the ads,” adds Parsons. “Consumer-led strategies will be key to growing sales and will require investment. Personalisation is no longer “being ahead of the curve” – it’s becoming a basic consumer expectation.”

Multichannel opportunities

Physical retailers have raised their game when it comes to competing for online sales, with the vast differentials in price between digital and store sales diminishing.

Bobroff believes a mindset shift also comes into play: “Physical retailers have narrowed the silo gap in how they think of store and online with their organisations. They are thinking about an omnichannel world and are happy for customers to buy in whichever channels suits them.”

Silsbury says: “Omnichannel theory cannot be something you are working on in today’s world, it needs to be organic within your business.”

The opportunities as he sees them lie in keeping a close control on costs. “Multichannel retailers like us must continue to ensure they understand exactly where their opportunities for growth lie and make their investment decisions accordingly.”

Parsons believes some operators are successfully bringing their channel-agnostic approaches into stores.

She says: “Online retailers have grown by offering newness on a faster scale than before, and this is where multichannel retailers now have an opportunity too. Zara is adopting this approach, not only through regularly refreshing stock but also by introducing online imagery from social media and influencers into store, and keeping its windows refreshed.”

But there are still further challenges for physical retailers if they are to meet consumer expectations.

Curran-Usher says: “Without doubt the consumer is choosing to shop from a position of convenience. The high street will need to address this in its strategy and transformation plans. It needs to position itself as a place of experience and emotion and make online the area of convenience.”

The Drapers Verdict

Macro-economic factors had a clear impact on online and retail sales during the second half of 2018 as consumers reined in spending amid ongoing uncertainty. During the first half of the year, however, online sales were resistant and grew 16%, boosted by spring and summer events including the Royal Wedding and the World Cup. This suggests that, without the macro issues, online sales can still perform well. This should be a source of comfort to retailers.

Those benefiting most are retailers who are taking their personalisation strategies seriously and developing a digital customer experience across channels. IMRG reported that all menswear retailers it tracks are performing well. The category is proving something of a testing ground for new technologies around sizing and styling. Improved information for customers on a more basic level, such as clearer onsite information, is also helping to drive sales – an indication that the customer experience must have clarity.

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